Fitch Ratings has downgraded the Issuer Default Rating (IDR) for
Washington Prime Group, Inc. (NYSE:WPG) to 'BBB-' from 'BBB' upon the
announcement that WPG entered into an agreement to acquire Glimcher
Realty Trust (NYSE:GRT) in a transaction valued at $3.2 billion
including the assumption of debt (herein the GRT transaction). Upon the
completion of the merger, which is expected to close during the first
quarter of 2015, the combined company will be renamed WP Glimcher. The
Rating Outlook is Stable.
KEY RATING DRIVERS
WPG's initial 'BBB' rating was predicated in large part on Fitch's
expectation that leverage would sustain between 5.0x and 6.0x, and be
towards the stronger end of that range. The downgrade to 'BBB-'
primarily reflects WPG's increased leverage towards 7.0x initially pro
forma for the GRT transaction and that organic de-levering could reduce
it back towards 6.0x at best over the next 12-to-24 months. Fitch
anticipates that WPG will fund the transaction with a combination of
asset sales to Simon Property Group, Inc. (NYSE:SPG, Fitch IDR of 'A'
with a Stable Outlook), joint ventures with institutional partners,
other assets sales, and capital markets transactions. Credit strengths
inherent in the GRT transaction include stronger mall asset quality pro
forma and the acceleration of WPG's transition towards self-management,
as WPG will maintain much of GRT's management team along with its
infrastructure and platform. WPG will retain ties to SPG for the
foreseeable future.
Increasing Leverage
WPG's pro forma leverage is expected to be between 6.5x and 7.0x upon
obtaining long-term financing, up from 5.5x as of June 30, 2014. Fitch
expects WPG to assume $1.3 billion of mortgage debt on the $3.1 billion
of assets it is acquiring from GRT (20 malls and three community
centers) while SPG is assuming $424 million of mortgage debt on $1.09
billion of assets it is acquiring prior to close. Fitch anticipates that
leverage will approach 6.0x by 2016 under Fitch's base case and
approximately 6.5x under Fitch's stress case. WPG is targeting 6.0x or
stronger leverage by 2016, and leverage sustaining below 6.0x may result
in positive momentum in the ratings and/or Outlook. Fitch defines
leverage as net debt to recurring operating EBITDA.
Weaker Liquidity Due to GRT's 2015 Secured Maturities
The transaction will weaken WPG's liquidity even after WPG obtains
long-term financing prior to close, primarily due to increased secured
debt maturing in 2015 that WPG is assuming from GRT. Pro forma, 0.7% of
debt matures in 2014 followed by 23.7% in 2015 and 5.9% in 2016. WPG's
liquidity coverage ratio declines to 0.6x pro forma from 1.2x as of June
30, 2014. Fitch defines liquidity coverage as liquidity sources divided
by uses through Dec. 31, 2016. Liquidity sources include unrestricted
cash, availability under revolving credit facilities, and projected
retained cash flows from operating activities. Liquidity uses include
pro rata debt maturities, projected recurring capital expenditures, and
projected cost to complete development.
The company has obtained a committed bridge loan facility of $1.25
billion if it is unable to obtain long-term financing prior to close.
Should the company draw on the bridge facility, which is not Fitch's
expectation, it would place further pressure on WPG's liquidity profile
initially. Nevertheless, the company is endeavoring to further
unencumber the portfolio, which is predicated on obtaining long-term
financing prior to close. Should the company refinance 80% of secured
debt maturities through 2016, liquidity coverage would improve to 1.4x.
WPG currently has re-development projects totaling $75 million along
with a cost to complete of $65.4 million associated with the Fairfield
Town Center development, while GRT has $88.4 million in development and
re-development cost-to-complete excluding University Park Village to be
acquired by SPG. Cost to complete is low, representing 2.7% of pro forma
gross asset value.
Contingent liquidity from the company's unencumbered pool remains
strong. The company's unencumbered assets (unencumbered net operating
income [NOI] divided by a stressed 8.5% capitalization rate) to net
unsecured debt is forecasted to decline to 3.1x pro forma, which is
strong for a 'BBB-' rating, from 3.7x as of June 30, 2014.
Long-Term Funding Expected Prior to Closing
Fitch's base case contemplates that prior to the closing of the GRT
transaction, WPG will raise long-term capital from various sources,
which Fitch views favorably. Fitch projects an inaugural unsecured bond
offering, equity from joint ventures with institutional partners, and a
combination of proceeds from asset sales and/or WPG common stock.
Stronger Asset Quality
The GRT transaction will improve WPG's asset quality as measured by
increased stabilized mall sales per square foot and increased portfolio
occupancy (92.8% pro forma compared with 92.6% as of June 30, 2014)
which Fitch views favorably. The GRT transaction deepens WPG's presence
in Midwest markets, while expanding the footprint in California, Florida
and Texas. In addition, Fitch estimates that 2014 weighted average
expiring rent per square foot increases to $18.39 from $17.59, 2015
weighted average expiring rent per square foot increases to $17.42 from
$16.40, and 2016 weighted average expiring rent per square foot
increases to $17.82 from $15.00.
Tenant concentration also declines pro forma, lessening tenant credit
exposure from top tenants. The top 10 tenants will comprise 13.5% of
rents pro forma, compared with 16.6% as of June 30, 2014. Top tenants
pro forma will be L Brands Inc. (2.5% of pro forma rent; Fitch IDR of
'BB+' with a Stable Outlook), Foot Locker Inc. (2.2%), Ascena Retail
Group Inc. (1.4%) JCPenney (1.3%; Fitch IDR of 'CCC' with a Positive
Outlook) and Luxottica Group S.P.A. (1.3%).
Fixed-Charge Coverage Initially Appropriate for 'BBB-'; Expected to
Strengthen
Under Fitch's base case, fixed-charge coverage is 2.3x pro forma
compared with 3.2x during the second quarter of 2014 (2Q'14).
Fixed-charge coverage is adversely impacted by increased fixed charges,
including secured debt interest expense on assumed mortgage debt and
preferred dividends on assumed GRT preferred shares. Under Fitch's
stress case, fixed-charge coverage is 2.2x pro forma. Both ratios are
appropriate for the 'BBB-' rating. Fitch estimates WPG's portfolio will
exhibit 2% to 3% same-store NOI growth over the next several years
primarily driven by rental rate increases as re-leasing spreads for GRT
are trending in the high-teens. Fixed-charge coverage of between 2.5x
and 3.5x would be appropriate for a 'BBB' rating. Fitch defines
fixed-charge coverage as recurring operating EBITDA less recurring
capital expenditures less straight-line rent adjustments divided by
interest incurred and preferred stock dividends.
GRT Team and Infrastructure Added; SPG Long Term Ties at Board Level
Mark Ordan (WPG's President and Chief Executive Officer) will become
WPG's Executive Chairman and Michael Glimcher (GRT's Chairman and Chief
Executive Officer) will become WPG's Chief Executive Officer and Vice
Chairman. Michael Glimcher and another member of the GRT board will
become members of the WPG board, increasing the board size to nine
members. By inheriting GRT's platform including property management, IT
and other functions, the GRT transaction will allow WPG to terminate its
transition services agreement ahead of schedule and accelerate WPG's
independence from SPG. Over the long term, WPG's ties to SPG will be
limited to the board memberships of David Simon and Richard Sokolov.
Stable Outlook
The Stable Outlook incorporates Fitch's expectations of leverage between
6.0x and 7.0x and fixed-charge coverage of around 2.5x over the next
12-to-24 months, coupled with the view that the company will finance the
GRT transaction with a combination of long-term capital sources prior to
closing. Liquidity is expected to improve as the company looks to
further unencumber the portfolio and extend debt duration over the next
12 months.
RATING SENSITIVITIES
The following factors may have a positive impact on Washington Prime's
ratings and/or Outlook:
--Fitch's expectation of leverage sustaining below 6.0x (leverage pro
forma for WPG obtaining long-term financing prior to the close of the
GRT transaction ranges between approximately 6.5x under Fitch's base
case and approximately 7.0x under Fitch's stress case);
--Fitch's expectation of fixed charge coverage sustaining above 2.5x
(pro forma fixed-charge coverage ranges between 2.3x under Fitch's base
case and 2.2x under Fitch's stress case);
--Fitch's expectation of unencumbered assets, using a stressed 8.5%
capitalization rate, coverage of net unsecured debt sustaining above
3.0x (this ratio is 3.1x pro forma under Fitch's base case and 2.5x
under Fitch's stress case).
The following factors may have a negative impact on Washington Prime's
ratings and/or Outlook:
--Liquidity coverage sustaining below 1.0x (this ratio is 0.6x pro
forma);
--Sustained deterioration in operating fundamentals or asset quality
(e.g., sustained negative SSNOI results or negative leasing spreads);
--Fitch's expectation of leverage sustaining above 7.0x;
--Fitch's expectation of fixed charge coverage sustaining below 1.8x.
Fitch has downgraded the ratings for Washington Prime Group, Inc. and
Washington Prime, Group, L.P. as follows:
Washington Prime Group, Inc.
--IDR to 'BBB-' from 'BBB'.
Washington Prime Group, L.P.
--IDR to 'BBB-' from 'BBB';
--$900 million senior unsecured revolving credit facility to 'BBB-' from
'BBB';
--$500 million senior unsecured term loan to 'BBB-' from 'BBB'.
Fitch expects to assign a 'BBB-' rating to Washington Prime Group,
L.P.'s unsecured notes.
The Rating Outlook is Stable.
Additional information is available at 'www.fitchratings.com'.
Applicable Criteria and Related Research:
--'Corporate Rating Methodology' (May 28, 2014);
--'Rating U.S. Equity REITs and REOCs: Sector Credit Factors,' (Feb. 26,
2014);
--'Treatment and Notching of Hybrids in Non-Financial Corporate and REIT
Credit Analysis' (Dec. 23, 2013);
--'Recovery Ratings and Notching Criteria for Equity REITs' (Nov. 19,
2013).
Applicable Criteria and Related Research:
Corporate Rating Methodology - Including Short-Term Ratings and Parent
and Subsidiary Linkage
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=749393
Rating U.S. Equity REITs and REOCs (Sector Credit Factors)
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=737957
Treatment and Notching of Hybrids in Non-Financial Corporate and REIT
Credit Analysis
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=726863
Recovery Ratings and Notching Criteria for Equity REITs
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=722363
Additional Disclosure
Solicitation Status
http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=873674
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